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Hidden Consequences of Accepting Debt Settlement Offers

Ohio consumers who have substantial delinquent credit card debt may receive
settlement offers to take care of the past-due balances from time to time
in the mail. Sometimes, people enter into settlement agreements with the
credit card companies, often settling their owed debt for half or even
less of the total balance.

While a settlement of credit card debt may seem like a terrific way to
get out from under unmanageable obligations, most people do not realize
that doing so may come with some pretty steep tax consequences. The IRS
considers the amount of canceled debt in some cases to be taxable income,
and so any amounts of $600 or more that are canceled as a result of a
settlement are reported by the credit card companies to the IRS each year.

The consumers will then receive a 1099-C in the mail from the creditor
as required by law. The 1099-C is a statement of miscellaneous income
and it must be entered as such on the individual's income tax return.
This can potentially lead to a significant tax liability from the IRS.
There is no requirement that creditors inform debtors that settlements
can result in tax liability, and many do not do so. Some consumers are
thus caught unaware by the unexpected tax bills that come as a result.

Despite the taxes, settling credit card debt still makes sense for some
people. For others, an alternative they may wish to consider is choosing
bankruptcy instead. People may be unable to afford to pay offered settlements
even if they are otherwise unconcerned about the tax liabilities. By filing
bankruptcy, people are able to obtain
debt relief. The IRS does not count debt that is discharged in bankruptcy as income
for tax purposes, unlike the treatment for canceled debt through a negotiated
settlement.

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